Senate Passes Broad Corporate Reforms

The Senate on Monday unanimously approved a bill that would impose sweeping reforms on the accounting industry and corporate management, measures aimed at restoring faith in the beleaguered business community.

The bill gathered unstoppable momentum following a recent spate of business scandals, and President Bush has said he is eager to sign legislation cracking down on corporate corruption. But the bill’s final shape remains uncertain. Senate negotiators now will work on a compromise with leaders of the House, which passed a less stringent bill this year.

The Senate bill would create an independent board to oversee the accounting industry, limit the ability of accounting firms to consult for companies they audit, ban corporate loans to company insiders, and crack down on other business practices that contributed to the scandals. It also would add new penalties for securities fraud and make it easier to prosecute dishonest executives.

Bush urged the House and Senate to get together “as quickly as possible and get me a bill that I can sign” before Congress adjourns for its August recess. “We owe it to America,” he said.

He and other White House officials have expressed reservations about some key elements of the Senate bill. But the Senate’s 97-0 vote approving the measure is likely to heighten pressure on him and House Republicans to rapidly reach agreement with Democrats pushing the tougher version.

Indeed, Senate Majority Leader Tom Daschle (D-S.D.) challenged House Speaker J. Dennis Hastert (R-Ill.) to forgo negotiations and take the Senate bill to the House floor immediately.

“It would be a disservice to the American people to now allow some to go behind closed doors to weaken it,” Daschle said. “So I say to our friends in the House: Do this the right way; pass our bill and start putting confidence back in our markets.”

John Feehery, a spokesman for Hastert, rebuffed Daschle’s proposal. Noting that the Republican-controlled House approved its bill in April and has been waiting for the Democratic-led Senate to act, Feehery said, “We’ve got a good bill, and we’re going to go to [negotiations] and get a better bill.”

The Senate bill was drafted by Sen. Paul S. Sarbanes (D-Md.) in response to the collapse of Enron Corp. late last year. It languished for several months, then was revived late last month after reports of WorldCom’s nearly $4-billion accounting misstatement caused jittery nerves from Wall Street to Washington.

During debate that began last week, Democrats and Republicans vied to strengthen the Sarbanes bill. The GOP position was particularly striking, given that Republicans generally oppose more regulation of business.

Sarbanes said the bill is needed to “ensure that investors can once again trust corporate executives and their financial reports, and have confidence in the independence of accountants and analysts.”

But on one issue, lawmakers were willing to go only so far. On Thursday and Monday, votes were blocked on measures that could have led to new accounting rules for stock options.

“It seems to me we are leaving a significant gap in the reforms which we are struggling so hard to adopt,” said Sen. Carl Levin (D-Mich.), contending that current rules allow companies to overstate their profits.

The unanimous vote on the overall bill testified to the change in the political environment powered by the cascade of corporate accounting scandals. Bush, for instance, arrived in office pledging to reduce, not increase, government oversight of business.

Before the second wave of corporate scandals, conservatives such as Sen. Phil Gramm (R-Texas) had hoped to dilute the bill on the Senate floor. But he ended up voting for the bill, saying the final measure emerging from negotiations should “fix what’s broken in our financial markets while imposing the minimum burden on those businesses and workers who have not abused the system nor broken the law.”

Pressure Is Increasing

The Bush administration had made clear its preference for the House bill. But analysts say the troubles on Wall Street likely will force Bush to bend further toward the Senate than he would like.

“The lopsided Senate vote makes it likely that any accounting reform bill that emerges from the upcoming House-Senate conference is likely to be a strong one--and one that tilts toward the Senate rather than the House bill,” said Robert Litan, economic studies director for the nonpartisan Brookings Institution in Washington.

Senate Minority Leader Trent Lott (R-Miss.) said that he discussed the Senate bill with Bush and Hastert last week and “both feel like the Sarbanes bill is within the range that they can support.”

A particularly contentious issue in the negotiations likely will be the structure and powers of a new accounting oversight board.

Both versions of the bill would create a watchdog panel for auditors. But critics of the House bill say it would create a weak board.

The Senate bill creates a board with full authority to set auditing and ethics rules and investigate and discipline auditors. The five-member board would be appointed by the Securities and Exchange Commission, with two members, but no more, having accounting backgrounds.

The House bill delegates much of the details of the new board’s authority to the SEC, an agency that critics say has not acted aggressively enough to root out corporate corruption. Democrats also say the board created by the House bill would have no power to set auditing standards and limited authority to punish violators. Under the House bill, the five-member board would be made up of two accountants and two other accountants who have not practiced accounting for the last two years.

The White House has expressed concern that the Senate bill could create a turf war between the new accounting oversight board and the SEC.

The Senate bill also would:

* Prohibit accounting firms from providing most consulting services to companies they audit, but give the oversight board authority to grant exemptions on a case-by-case basis. The House bill would restrict only two types of consulting. The lucrative consulting fees Enron’s auditor, Arthur Andersen, received from the energy firm were seen as a factor that prevented auditors from aggressively challenging Enron’s questionable accounting.

* Require accounting firms to change the lead auditor after five consecutive years of auditing a company. There is no similar provision in the House bill.

* Empower the SEC to bar dishonest corporate officials from serving as officers and directors of public companies. Bush called for this provision in his speech to Wall Street last week.

* Increase penalties for white-collar crimes, including Bush’s proposed doubling, to 10 years, the maximum prison term for mail and wire fraud.

* Create a new felony statute for securities fraud and increase penalties for document shredding.

* Extend the time frame from three years to five for plaintiffs to bring securities fraud lawsuits against companies, and prevent corporate officers who lose securities fraud lawsuits from using bankruptcy laws to avoid payments to victims. The House bill has no similar provision, but House GOP leaders have endorsed the tougher criminal penalties.

* Require corporate executives to certify their companies’ financial reports. Chief executives and chief financial officers could be forced to forfeit bonuses and other compensation if they file false financial reports.

The House and Senate bills have a number of common features. Both would impose new financial disclosure requirements on public companies. Company insiders would have to disclose loans and stock trades in a more timely manner. Companies would have to disclose off-balance-sheet partnerships, such as the ones used by Enron to hide hundreds of millions of dollars in losses.

Both measures would ban corporate executives from trading stock when rank-and-file employees are locked out from making changes in their company stock retirement portfolio. Both measures direct the SEC to establish conflict-of-interest rules for stock analysts.

And House and Senate legislation calls for substantially increased funding for the Securities and Exchange Commission to investigate corporate corruption, far more than Bush has proposed.

Business lobby groups largely stepped aside as the Senate bill steamrolled toward approval in recent days. But the lobbyists plan to press their objections to the legislation during the Senate-House negotiations.

R. Bruce Josten, executive vice president of the U.S. Chamber of Commerce, sent a letter to senators Monday supporting a number of provisions but objecting that the accounting oversight board would “at best duplicate--or at worst --conflict, with existing SEC oversight, thus confusing business with respect to the body of rules and regulations to observe and with which to comply.”

Elections on the Horizon

The debate over corporate accountability has begun to migrate into the midterm congressional elections. Operatives in both parties say it is unclear whether voters will parse through the differences between the two sides on some of the highly technical questions. But with candidates such as Texas Democratic Senate hopeful Ron Kirk attacking their rivals for links to Enron and WorldCom--and others declaring their support for an “investor bill of rights”--legislators have grown leery of appearing too soft on corporate malfeasance.

“That issue is lightning in a bottle,” said Bill Fletcher, the communication director for Bob Clement, the Democratic Senate candidate in Tennessee.

Adding to the political fireworks, the Senate debate crystallized just as Bush was facing renewed questioning over his sale of stock in Harken Energy Corp., a company on whose board he sat, just before it announced significant losses 12 years ago. After an investigation, the SEC concluded in 1991 it had no basis to charge Bush, but he’s facing rising demands from Democrats to release the commission’s files on the case.